The winner of the May 18 federal election faces a slowing economy that could put its political agenda on ice after the Reserve Bank of Australia sliced its own forecasts while resisting pressure to cut official interest rates to a record low.

"On one hand, everyone knows the economy is wallowing in mediocrity, but on the other hand it is 10 days before an election so everything will be viewed through that pressure," he said.

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The decision to keep rates stable came despite a shock inflation reading of zero for the first three months of the year and amid growing market confidence the official cash rate would be cut due to consistently disappointing wages growth, household consumption and gross domestic product.

Prime Minister Scott Morrison said the central bank was cautious, but would have been pleased to see jobs growth. He urged voters against taking a "big risk" with Labor policies in the current economic environment.

RBA governor Philip Lowe held the line on rates. The RBA has intervened in a federal election campaign to change borrowing rates only twice in Australian history.Credit:Bloomberg

RBA governor Philip Lowe said the board would be "paying close attention" to the labour market at its upcoming monthly meetings, hinting that any sustained rise in unemployment could lead to a rate cut.

UBS economist George Tharenou said his reading of the statement was that for the time being "the unemployment rate is the de facto target for the RBA". "Should conditions deteriorate, the RBA will cut the cash rate," he said.

In his statement outlining the rates decision, Dr Lowe revealed the bank had downgraded its key economic forecasts and now expected the economy to expand by 2.75 per cent this year. As recently as February, it believed the economy would grow by 3.3 per cent.

It also now expects underlying inflation to hit 1.75 per cent this year and 2 per cent in 2020, a quarter percentage point cut on its forecasts from earlier in the year and well short of its own inflation target band of 2-3 per cent.

"The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices," Dr Lowe said.

Interest rates have been on hold since a month after the 2016 election, the longest period of interest rate stability in Australian history.

Just hours before the RBA's rates decision, the Australian Bureau of Statistics released poor retail trade figures for March.

While overall retail trade grew 0.3 per cent through the month, there was a 0.1 per cent drop in volume turnover through the quarter. It was the first quarterly fall since September 2012 and well short of market expectations of a 0.3 per cent lift.

The drop followed a flat December quarter and a 0.2 per cent lift in September. It would have been much worse but for a 0.6 per cent lift in NSW, partly offsetting falls in every other state and territory.

Separately, the latest Australian Industry Group-Housing Industry Association's performance of construction index, showed a three-point drop in April and is now pointing to a sharp downturn in housing and apartment construction as well as the commercial sector.

AMP Capital chief economist Shane Oliver, who believes unemployment will edge up to 5.5 per cent by year's end, said the bank was putting at risk its own long-term credibility as it waited for inflation to rise.

"The problem for the RBA is that inflation has been under-shooting its forecasts and the 2-3 per cent inflation target for several years now," he said.

"The longer this persists, the more the RBA will lose credibility, seeing low inflation expectations become entrenched, making it harder to get inflation back to target and leaving Australia vulnerable to deflation in the next economic downturn."

Commonwealth Bank chief economist Michael Blythe said it appeared the RBA was "very tolerant" of ultra-low inflation, with the consumer price index below the RBA's target band for 16 of the past 18 quarters.

He said the shift in language by the bank to focus almost solely on the jobs market meant next week's April employment report was pivotal for interest rate settings.

"The RBA board today no doubt debated the efficacy of interest rates cuts. And whether rate cuts are the appropriate policy tool to deal with the weakness in household disposable incomes," he said.

The bank's next quarterly monetary policy statement, which will contain fresh forecasts on the economy, is due for release on Friday.